AUD Faces Pressure as RBA Rate Hike Bets Clash with Dollar Strength

What’s Happening

The Australian Dollar is retreating for a sixth consecutive session against the US Dollar, even as markets increasingly price in an RBA rate hike possibility. Consumer Inflation Expectations surged to 4.7% in December, up from November’s 4.5%, adding fuel to hawkish central bank narratives. Meanwhile, the greenback continues to dominate after softer Fed rate cut signals emerged from recent labor market data.

RBA Tightening Expectations Support AUD—But Not Enough

Australia’s inflation expectations rising to 4.7% are bolstering arguments for earlier monetary policy tightening. Commonwealth Bank and National Australia Bank have shifted their forecasts, now projecting RBA action as soon as February—earlier than their previous calls. Swap markets reflect this shift, pricing a 28% probability of a February increase, climbing to 41% for March, with August almost completely priced in.

The Reserve Bank’s hawkish hold at its final 2025 meeting reinforced these expectations. Yet despite these dovish-to-hawkish signals, AUD struggles to gain traction. This highlights a critical market dynamic: when your own central bank signals tightening while the other major player signals patience, currency weakness often prevails.

US Dollar Strength Outweighs AUD Support

The US Dollar Index, tracking the greenback against six major currencies, remains anchored near 98.40, buoyed by diminishing expectations for additional Federal Reserve cuts. Recent US jobs data painted a mixed picture—November payrolls rose 64K (slightly above expectations), yet October figures were sharply revised lower. Crucially, the unemployment rate climbed to 4.6%, marking the highest level since 2021, signaling gradual labor market cooling.

Retail sales data remained flat month-over-month, reinforcing concerns that consumer demand is losing steam. Despite this softness, Fed officials remain divided on the need for further easing. The median Fed projection shows just one rate cut for 2026, while some policymakers see no additional reductions. Traders, however, anticipate two cuts next year. CME FedWatch tools suggest a 74.4% probability the Fed holds rates steady in January, up from 70% one week prior.

Atlanta Fed President Raphael Bostic cautioned that “multiple surveys” signal rising input costs as firms defend margins through price increases. He warned that “price pressures extend beyond tariffs alone,” suggesting the central bank should avoid premature declarations of victory on inflation.

Economic Data Mixed: China Weakens, Australia Improves

China’s November data disappointed markets. Retail Sales rose just 1.3% year-over-year against a 2.9% forecast, while Industrial Production increased 4.8% versus the 5.0% projection. Fixed Asset Investment missed expectations at -2.6% year-to-date versus the expected -2.3%. These softer readings could weigh on commodity-linked currencies like the Australian Dollar.

Australia’s manufacturing sector showed modest resilience. The S&P Global Manufacturing PMI edged higher to 52.2 in December from 51.6, though the Services PMI contracted to 51.0 from 52.8. The Composite PMI slipped to 51.1 from 52.6, suggesting economic momentum remains fragile.

Employment data delivered mixed signals. The Unemployment Rate held steady at 4.3% in November, beating consensus at 4.4%. However, Employment Change fell to -21.3K from October’s revised 41.1K, disappointing the 20K forecast and signaling potential labor market softening ahead.

Technical Outlook: AUD Under Pressure

The AUD/USD pair trades below 0.6600, positioned beneath the ascending channel trend that previously supported bullish momentum. Trading also sits below the nine-day Exponential Moving Average (9-day EMA) at 0.6619, confirming weakening short-term price dynamics.

Downside risks loom large. The pair could test the psychological 0.6500 level, followed by the six-month low of 0.6414 (recorded August 21). To convert USD to AUD at the current 358 USD to AUD reference point, investors face continued headwinds.

Upside recovery would require a move back toward the 9-day EMA at 0.6619, followed by the three-month high of 0.6685. Sustained advances could target 0.6707 (the highest since October 2024) and potentially the upper channel boundary near 0.6760.

Currency Performance Snapshot

The Australian Dollar weakened most notably against the Japanese Yen today, while posting modest strength versus the Swiss Franc. Across major pairs, AUD registered losses to USD (+0.19%), EUR (+0.22%), GBP (+0.16%), and JPY (+0.27%), underscoring its relative weakness in the current environment.

The Bottom Line

While RBA rate hike expectations provide theoretical support for the Australian Dollar, Fed policy divergence and broader US dollar strength overwhelm these dynamics. With inflation expectations rising domestically but softening globally, AUD faces a challenging technical setup and fundamental headwinds until broader market sentiment shifts.